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Bailout Reax
BAILOUT REAX....Paul Krugman opposes the Paulson/Bernanke bank rescue because there's no guarantee it will work. Atrios doesn't like it because it gives Paulson a blank check with no oversight. Brad DeLong doesn't like it because it lacks necessary reforms to balance the bailout. Sebastian Mallaby, by contrast, just doesn't like it, period:
Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans.
....Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don't do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don't want to signal weakness and they don't want to dilute existing shareholders. A government order could cut through these obstacles.
Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks' bad loans but by buying equity stakes in the banks themselves. Whereas it's horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.
Congress and the administration may not like the sound of these ideas....But we are in the midst of a crisis, and it shouldn't matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward.
The tide has started to turn against the bailout plan surprisingly quickly. Is this just because the market recovered on Thursday and Friday and things seem slightly less scary now than they did a couple of days ago? Is it because this plan is flawed at its core? I'm not sure. But by the time Monday rolls around, I suspect there's going to be at least a strong minority consensus that we should all have a little more information before we get steamrollered into approving this thing.
Meanwhile, if you're looking for a good old fashioned screed against greedy bankers written by someone from within their own ranks, check out Eric Hovde in the Post today. It'll help clear your arteries.
UPDATE: And then there's this:
"A lot of those people will have to sell their homes, they're going to cut back on the private jets and the vacations. They may even have to take their kids out of private school," said [Robert] Frank. "It's a total reworking of their lifestyle."
...."It's going to be very hard psychologically for these people," Frank said. "I talked to one guy who had to give up his private jet recently. And he said of all the trials in his life, giving that up was the hardest thing he's ever done."
Anybody got a tissue? I think I may start crying.
Bernanke and Paulson triggered this mini crisis by deliberately allowing Lehman Brothers to fail. rational on 09/20/08 at 11:11 PM
By some strange coincidence, Lehman Bros was a big contributor to Obama and was the one house that contributed more to Democrats.
[Among Obama's campaign contributors are many Lehman Brothers Executives, such as CEO Richard Fuld ($2,300), President Joseph Gregory ($4,600) and dozens of other top Lehman Executives. On June 19th, Lehman shareholders filed suit against Fuld and Gregory for the company's exposure in the subprime market. In addition to dozens of Lehman executives are Obama's bundlers from Lehman Borthers who have raised top dollar for the campaign. Direct contributions from Lehman Brothers have exceeded $395,000 for Senator Obama.
John Rhea - (over $500,000) Co-Head of Lehman Bros. Global Investment Banking
Mark Gilbert - (over $500,000) Lehman Brothers Senior Executive
Christine Forester - (over $500,000) Lehman Brothers Senior Executive
Theodore Janulis ? Bundler (over $100,000) & Lehman Brothers Head of Global Mortgages
Nadja Fidelia ? Bundler (over $50,000) & Managing Director of Lehman Brothers]
Looks like they had to fall.
Dean Baker offers some progressive Conditions for a Bailout
Bernanke and Paulson triggered this mini crisis by deliberately allowing Lehman Brothers to fail. rational on 09/20/08 at 11:11 PM
By some strange coincidence, Lehman Bros was a big contributor to Obama and was the one house that contributed more to Democrats.
[Among Obama's campaign contributors are many Lehman Brothers Executives, such as CEO Richard Fuld ($2,300), President Joseph Gregory ($4,600) and dozens of other top Lehman Executives. On June 19th, Lehman shareholders filed suit against Fuld and Gregory for the company's exposure in the subprime market. In addition to dozens of Lehman executives are Obama's bundlers from Lehman Borthers who have raised top dollar for the campaign. Direct contributions from Lehman Brothers have exceeded $395,000 for Senator Obama.
John Rhea - (over $500,000) Co-Head of Lehman Bros. Global Investment Banking
Mark Gilbert - (over $500,000) Lehman Brothers Senior Executive
Christine Forester - (over $500,000) Lehman Brothers Senior Executive
Theodore Janulis ? Bundler (over $100,000) & Lehman Brothers Head of Global Mortgages
Nadja Fidelia ? Bundler (over $50,000) & Managing Director of Lehman Brothers]
Looks like they had to fall.
Dean Baker offers some progressive Conditions for a Bailout
I predict it will be much more than a "significant minority". The first candidate to frame it as the people vs the bankers wins the election. I think Obama has the upper hand here policy wise, though McCain is just crazy enough to go there first.
I liked one of your commenters suggestion to tie any bailouts to an agreement to significantly cut CEO pay.
Much as I love these guys, I don't think what Krugman, Atrios, and DeLong say is going to matter all that much to the outcome of this attempt.
The balance of power is held by places like the NYT editorial board; and they unfortunately have been singing the same tune as Schumer lately.
No private jet?
My heart bleeds.
I don't know lampwick. There seems to be consensus from the left and right blogosphere that this plan isn't quite right.
I emailed both the McCain and Obama campaign's telling them that my vote was up for grabs on this singular issue.
Come on, Kevin. These people are used to their private jets, multiple mansions, etc. It would hurt them to have to change their lifestyle.
Same thing with the homeless. It would be cruel to force a family that lives under a freeway bridge to suddenly live indoors. Status quo über alles (if I may mix languages for a moment).
The congressperson you should be emailing is Chris Dodd. I suspect that his is a pivotal vote on the bailout plan. If his staff reads enough emails that quote the reasoning of Krugman and Atrios, he will know that the educated hinterland is against the deal.
Write Congress now. Monday will be too late.
You know, if every single reader of Kevin's blog emailed out Dean Starkman's essay (and I do mean email it - not just linked) then we could change the tide across the country.
http://www.cjr.org/essay/boiler_room.php?page=all
I've passed it along to my list. People need to be reminded of what exactly it is we are bailing out with our tax dollars.
This deal is too metaphysical to penetrate very clearly into the minds of low-information voters. The fact that the left and the right halves of blogosphere consider it a disaster only goes to show how many metaphysicians inhabit it.
Or allow me to switch metaphors from philosophy to sci-fi: for John Q voter, we're basically borrowing a gazillion dollars from the future in order to help the people of the Zyglzybyx system fight off an invaders from the fourth-dimension, invaders who possess a deadly weapon nicknamed Uncertainty which causes banks to freeze and liquids to dry up.
I mean, it's really, really abstract and unbelievable; and therefore all the more easy to spin.
So much so, in fact, that Matt Drudge was putting up images of fireworks on Friday as if this whole bailout was nothing but good news and stood as a testament the invincibility of capitalism.
I mean: wow...
I just emailed my senators, for all the good it will do me.
Two things:
How long does it take Americans to save $700 billion?
The "no judicial review" clause would seem to make it much more likely that the money will leak out the back door.
Kevin, you are such a partisan hack. The USC-OSU game was over after the first quarter, but the blog shut down for four hours last weekend... Now we have Auburn-LSU playing a white knuckle duel and you're writing about banking! This is why democrats never win the south.
: )
The theatrically upfront disclosure of the "no judicial review" clause makes you wonder if this is designed not to pass. In the interim, though, stocks skyrocket, and banks have some breathing room.
I have a question, OK two questions.
What will the bailout mean for taxes and federal spending? My guess is higher taxes, less spending.
Is this a bad time to take over the presidency? My guess is that the next President is going to preside over an extended period of recession and heartache and will have an uphill struggle to be re-elected.
We've had too many experiences with these guys to rush through one of their plans without very careful expert examination. If the past is any indicator of how things will work out, this may be a long researched plan with known -but nonobvious consequences that could be very unpleasant for those not favored by the elite. Most likely it is more Chicago school stuff, dump debt on the public, and profit to the tiny favored global elite.
The more I think about it, the more it appears that Bernanke and Paulson triggered this mini crisis by deliberately allowing Lehman Brothers to fail. They and other bankers at last weekend's emergency meeting must have had a good idea of Lehman's condition and had a fairly good idea of the impact of its failure. It failed and that put pressure on AIG as well as on at least one money market fund (Reserve Primary money market fund). Either Bernanke and Paulson did their due diligence or they did not. Considering the group of people present at the emergency meetings and the power available to the Fed, they must have had a good idea of consequences of letting Lehman fail. If they didn't, well that brings up the possibility that they are too incompetent to be trusted with managing a Trillion dollar bailout.
It appears they let the failure go through, knowing it would trigger a mini crisis. And when that mini crisis started, they went to Congress and scared the heck out of them (read http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?_r=1&hp&ore...) to preempt their defenses. With Wall Street, Main Street, and Congress scared, Bernanke and Paulson leaked news of the bailout plan 45 minutes before market close on a Thu before an option expiry Friday. That timing, a trick the Fed used to punish short sellers during the 1998 LTCM crisis when it announced a surprise rate cut, was deliberately set to create a humongous rally at the expense of short sellers. So they had all the elements lined up BEFORE the 7 pm Thu evening meeting with Congressional leaders to unveil this mega bailout. They have also demonstrated the difference in reaction to deal vs no deal. Given the dramatic difference between the two reactions, Congressional leaders would have little prayer of resisting a rush job.
Having watched Bush administration in action the last 8 years, I am unable to shake this suspicion off.
The consequences of a botched job of a bailout are enormous. We are lucky to have this opportunity to fix this problem before the world completely loses faith in the US. Congress should deliberate this over several weeks. It takes that long for the pros and cons and details to sink in to someone's head. Global financial markets already know the US government is focused on the problem, so why not take time to do it right?
Interesting article on the politics of the crisis: http://www.msnbc.msn.com/id/26808504/. Supports my suspicion that Paulson and Bernanke had enough motivation to give a preview of impending disaster in order to break the will of Congress.
What would be even worse is if this plan passes with Democratic-sponsored trinkets on it e.g. a $300 rebate for every upside down mortgage-holder or some such nonsense.
So, for a cool 700 billion, Americans can have:
1) A bunch of bad assets from a number of large investment banks that most likely will become worthless
2) Uncle Sam cover about 1/3 of the entire existing costs of our health care system for a year.
3) 17.5 Million Chevy Volt plug in hybrids
4) 60+ state of the art, CVN-21 aircraft carriers (about 3x the total number of carriers that we have right now)
5) 7 Billion barrels of oil (roughly one year of oil use for the entire U.S.)
6) Roughly 700,000 1Mw wind turbines
7) The entire cost of the Iraq war until about sometime next year.
8) 250 million 17" Macbook Pro's- almost enough for one for every single person in the United States
Josh Marshall rightly understands that the key is the price to be paid for the toxic debt, which he assumes to be "fair value". But that's only half the story.
Atrios had asked rhetorically: "What changed between Monday and Friday? What new information did you have at the end of the week that you did not have at the beginning of the week which caused you to go from $0 to $1 trillion?"
What Paulson & Co learned, I suspect, is that if all this toxic debt were valued fairly, then just about every financial institution on Wall Street (799 of them?) would already be insolvent. Dead men walking.
What this means is that, even if the government were to buy all the toxic debt up at fair value, many banks, funds, and brokers would probably go belly up anyway. The very catastrophe they are supposedly trying to forstall has already happened, but is being ignored for now. Buying up all this debt at fair value would force the truth out into the open. The financial system would end up in receivership, and the the stock market would collapse.
Taking it a step further: The only way to forstall catastrophe is to buy the debt for MORE than fair value. The taxpayers would make these sinners at least partially whole.
Even if that were acceptable from the taxpayers' standpoint, consider this: This bailout would bedone without any Congressional or judicial oversight whatsoever. Paulson & Co would be handed $700 billion and allowed to pick and choose which companies they'd save (and under what terms) and which ones they'd allow to fail.
Are you up for that idea?
I'm not an economist, but suggesting that the government buy stock in the banks as it is a 'fair' value of the worth of the stake seems incredibly foolish to me, especially in light of how we got here.
Here's what election '08 meme should be from here on out:
'McCain: "Richistan" First'
Hmmm. I don't think the idea of buying debt is a bad one. I do think there should be some punitive measures accompanying it.
The reason that I support the idea of buying debt is that it should free up the market to resolve most of the issues -- in other words, doing it this way has leverage, should be cheaper, and can inject much more money and liquidity into the system. Removing the debt they can't accurately value will allow companies who sell their debt to have access to credit again -- people will loan to them if they can assess their financial state and determine they're stable. The credit markets can make far, far more funding available to companies than the US government can.
I think there should be a steep price for this. The debt should be bought at a huge discount. I've heard 30 cents on the dollar mentioned, and I think the price paid could even be less than that. That should be a serious hit on the companies that put themselves in this situation, but should allow them to survive.
Second, I do think that the companies who participate should have limits set on executive salary, for some period of years (5? 10?). An upper limit of $2 million per year was mentioned, and I assume that is OK, and I would also add that compensation should be strictly limited to salary. No bonus, no stock options, no pension, no life insurance, none of it. The companies will argue that this would put them at an enormous disadvantage on recruiting executives. Good. Since the old way of recruiting and managing executives apparently didn't work too well, maybe this will force them to take a different approach.
If you use the same numbers to extrapolate this current Bush legacy ploy from his Iraq debacle (50B to 1 T)
you get 14 trillion.
I turn 60 on Monday and from 7-9 AM will hold a NO BAILOUTS sign over the inbound Interstate 5 Corbett overpass in Portland, OR.
Please stop this madness for the worlds sake. Yes, the people directly involved in the ponzi schemes of the Naughties and bad mortgage debt will need to be processed but it is nothing the system can't handle. Our pain under NO BAILOUTS will be much less than the global pain that will be felt if we allow the crime of adding these BAILOUTS to continue. We need to not turn the rest of the world into economic terrorists against the US.
This sort of voodoo economic America is not what they teach in school, is it?
Stand Up America!!!!
Bailout ridiculous, and not needed, and only taxes future generations. (And both candidates want to increase govt spending?) NESARA as drafted by Dr. Barnard is the only way out of our fiscal and monetary mess. Force balanced budget, abolish income and capital taxes in favor of 14% sales tax on everything else except rents, groceries, insurance, and medical services; abolish compound interest on secured loans in favor of simple monetization fee, and require principals be paid before before banks are allowed to collect on the monetization fee. No payment no matter how small will always reduce a debt to zero, banks more willing to prevent foreclosures and will turn around funds for more loans sooner. No more of this pay for 2.5 houses just to own 1. Pay for just 1.5 and be done with it in 17 years. NESARA (not the hoax, but Dr. Barnard's original version). Google the NESARA Institute.
I have a particularly depressing thought I'd like to share.
These events are a bit like returning to the heyday of the guilds in Venice, the Hansa cities, or Osaka. Back in the day, leaders who depended on trade guilds as a source of wealth got locked in a bilateral monopoly with them: the monarchy could discipline a guild over its performance by threatening to yank its license; but only the guild knew how the market under its control functioned and what reasonable performance really looked like. It worked, but it was not very efficient.
Government and the financials are now in much the same spot. They're effectively writing roughcut commercial law from scratch, in the context of a live dispute, with incomplete information, and no impartial process or tribunal to help resolve the information asymmetries.
There has been frequent mention of moral hazard in the buyout plan that's on the table now. I'm wondering what happens if things don't return to "normal", and rolling financial crises and responses become a fixture of government. You could see this eventually kicking the props from under the constitutional settlement.
Darn. Until a few minutes ago, I was actually having a pretty good day.
Hmm. In the proposed legislation, the provision exempting all actions of the Treasury Secretary from judicial review is "Section 8".
How fitting.
Hey, now that's nice. Section 9 provides for termination of authority after two (2) years, "with the exception of authorities granted in sections 2(b)(5), 5, and 7". Okaaay, so what sort of authorities does section 2(b)(5) give to the Treasury Secretary? "Issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act."
That might not sound so bad, but think about it. What prevents the financial industry from ganging up on the government? Laws like the Sherman Act. Why do neo-classical law and economics jocks poo-poo the Sherman Act? Because even oligopolies with relatively few players are unstable. What can make them stable? Um, typically some sort of government regulation that masquerades as "public interest" legislation. Alright. Now consider that none of the "regulations and guidance" issued under this (sensitive persons avert your eyes, I'm going to use the "S" word now) piece of shit are reviewable in court, which excludes any effort to cartelize the industry from ... the Sherman Act. And if you'll notice, although some of the authorities granted by this bill would expire after two (2) years, the exemption from judicial review is not an authority, so you're stuck with this crap forever.
I originally thought that my flight of fancy about medieval guilds was only that; but this is pretty horrifying. If you just apply normal assumptions of selfish wealth maximization to these rules, you have to assume that they basically give the financials a license to print money for themselves, indefinitely. Hell, it even gives them an incentive to perpetuate the crisis, and the tools to do so.
Global War on Terror, please let me introduce you to Global Economic Crisis.
I hope that Congress doesn't blow this one. I'm just an ordinary bloke, but to me this looks like a really dangerous piece of paper. (link under the Jassalasca Jape nickname below)
Oops, sorry. The link to the draft should work in this post. If not, apologies.
Blank check MY ASS!
Regulation starts NOW.
This plan is certainly flawed at its core. It is put together by a political hack (Paulson) and it is more of the same -- it has no ACCOUNTABILITY ! !
Am grateful to all of you for explaining much of this because, well, economics really isn't my thing.
But I do know one thing. Anything, and I do mean anything, that the Bush administration wants passed in a week is something to be wary of.
I hope at least someone reads the damn thing all the way through and spends more than a nanosecond thinking about the implications of the various provisions. I don't trust the folks who brought you the Patriot Act and the AUMF in Iraq and a host of other things that Democrats, in an effort to look and act in a cooperative and bipartisan manner, got snookered into going along with.
This administration has proved time and time again that it cannot be trusted on anything. I don't want to hear that Bernanke and Paulson are different, not the usual Bushies. Hate to quote another Republican, but at least Reagan had the sense to "trust but verify" --- I'm afraid the Dems don't have that sense. In the interviews I've seen, Dodd seems awfully spooked and maybe too eager to give the President what he wants. This shouldn't be a political football just for the sake of playing a game, but the Dems need to be more involved in shaping the plan and ought to get something out of it for Main Street.
The update is sickening. Total Vomitville. Can we link that guy to McCain anyhow, have his words be part of a commercial?
Obama should quote Reagan's "trust but verify."
And I still have a simple question, asked from sheer ignorance: who winds up owning the houses?
There are some, like my very liberal brother-in-law, who says we should let it all collapse. Let the shit hit the fan while Bush is still in office and let the ensuing catastrophe destroy the GOP brand for the next 40 years, the way the Great Depression did, post-Hoover.
I still have children living at home - so I don't want to let them suffer, so I tend to prefer the bailout. If they were self-sufficient, I would be willing to endure some pain to put the hurt to these conservative shit-for-brains in a big way!
I say, let it collapse because it's going to collapse anyway. Better to let the system take out the bad eggs than to let Paulson & Co pick and choose.
Meanwhile, use the $700 billion to save homes, and buffer the effects of the calamity for regular people.
Most people want to avoid a meltdown. The Bush proposal had no public details. The devil is in the details.
The public still wants to avoid a meltdown. However, the Bush proposal has serious flaws that are worse than the problem.
The upside to the $700 billion bailout is we won't be able to afford any more discretionary wars.
I hate these people so much.
Here's Paulson today: "We need this to be clean and to be quick," Paulson said in an interview on ABC's "This Week."
http://news.yahoo.com/s/ap/20080921/ap_on_bi_ge/financial_meltdown
Fuck that. Handing Hank $700B (BILLION!!!!) of OUR money to distribute to his buddies is NOT clean. It's the epitome of dirty
The mere fact that GW Bush wants this "quickly" indicates to me that we should probably think about doing the exact opposite.
How many times can the Bush administration sabotage the country before Congress stops automatically passing W's wish list?
As Jassalasca Jape notes, the provisions of Section 8 alone ought to be enough to get this bill rejected out of hand, regardless of its other merits. Section 8 reads: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Yves Smith sums up my reaction: "This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry."
So, congress is going into the tank for President "is there anything he hasn't screwed up?" Bush.
Paulson looks like a raccoon setting his sights on an open garbage can.
The regulations worked just fine until the 1980's when they started peeling them away.
It's an election year and Paulson has scared congress. We need to counterbalance that with tons of calls, emails and letters.
Both Bush and Dodd have said that we don't need to talk about how we got here.
Oh yes we do.
The irony is that the strength of our economy in the world is based on trust. And now we have to trust the very people who broke the economy to fix it. If I were going to bet on this, I'd say, "We're fucked!"
Meanwhile, use the $700 billion to save homes, and buffer the effects of the calamity for regular people.
There is no $700 billion. This is simply a fictitious number set up as an imaginary goalpost as we pass from whatever sort of economy we used to have to one of feudalistic servitude under a ruthless and utterly corrupt oligarchy.
However bad a collapse will be, it won't be as bad as the place these criminals want to take us.
But WHO winds up owning the houses?
"But WHO winds up owning the houses?"
Squatters.
I don't think so.
A house sells for 160k in 1995 (and the mortgage is re-sold, again and again, backed by Fannie and Freddie), and again (fixed up) for 250k in 2002 (When the mortgage-backed securities and derivative markets takes off). A bunch of folks without a lot of resources pool their money and buy it for 310k on an ARM in 2004 (the sloppy stuff accelerates), then half of 'em refinance in 2006 (while half of the first ones walk, to buy another house on similar terms, while another half of folks come in on the refinance) with no money down, no equity, AND a second mortgage .. two ARMS on the same house, now assessed (and mortgaged) at 360k. The plan was that the place could be refinanced (or even sold) at 400k in 2008 -- but it can't.
Everybody keeps saying that the problem we're trying to solve isn't the bad mortgages, nor even the securities backed by the bad mortgages, but the way credit default swaps and insurance and derivatives caused this accelerating mess to put even businesses that did NOT issue nor invest in subprime mortgages to be at risk.
Okay -- but I still wanna know who winds up owning the houses.
They have a value, after all -- which a derivative made up of a bet gone bad, does not.
If we, the taxpayer, are gonna pay a trillion dollars for worthless ... well, for WHAT, exactly? I'd like to know who winds up owning the actual assets at the bottom of it all.
Where's Obama?